Dell Computers managed to generate a storm of analyst speculation in the spring of 2002 when it announced it was looking to double its sales within five years. This would require it to enter into new markets, offer new products, or possibly both.
Industry analysts and players thought the most likely strategy would see Dell enter the printer market, dominated by Hewlett-Packard, which had just controversially bought out Compaq to form HPQ. But other than selling third-party printers through its website, Dell had zero experience or capabilities in this sector. While it could obviously buy an established company, acquisitions by Dell were very rare. There was also a definite risk that expanding its product range would antagonise its main partners, like Cisco Systems.
Other standard approaches to moving into markets also seemed unlikely to many. But one top equity analyst thought that Dell just might be able to "have an inverse impact on HPQ's multiple.... [HPQ's] investors could be unnerved, if and when Dell says it is going to do to the printer business what it did to the PC business". The case illustrates the ways in which a global market leader may often try to leverage its strong brand identity in one area to succeed in a very different field. In Dell's case, this meant a big departure from its very centralised core business.
Associate Professor of Strategy Javier Gimeno describes the dynamics in the modern desktop printer industry, and why Dell saw it as a major window of opportunity. The author explains why, from a marketing perspective, the printer industry was a "classic razor/blade business". In most markets, printer hardware is heavily subsidised to attract customers. The ink, however, is one of the most expensive products in the world. Gimeno illustrates how printer producers were able to generate the huge margins that ink sales offered, backed by considerable R&D investment and intense patent protection of developers' intellectual property.
Only founded in 1984, Dell was the largest PC assembler in the USA by 2002. Its success had been based on its focus on efficient assembly and logistics management, particularly regarding its inventories. It had also excelled at customer relations and being able to provide customised products, especially for the larger customers that it had prioritised in its market targeting.
The case reveals how analysts were divided over Dell's chances for posing a serious threat to H-P. The latter had by then become the standard supplier of printers and related equipment to most of the world's biggest corporations, who generally tended to prefer standardising internally to a single primary supplier. But in July 2002, Dell announced its probable intention to enter the printer market. Four days later, H-P let Dell know that the latter would no longer be a reseller of its printing and digital imaging products.
Dell, however, had already been cutting its sourcing commitments to H-P after the Compaq merger, in favour of a major competitor, Lexmark. Analysts were already impressed that Dell's announcement of its only likely intention had made HPQ so nervous. But many remained highly sceptical that Dell could apply the lessons it had learned from the aggressive model it had applied in the PC sector to printers.
Dell obviously had nothing like the extensive distribution and retail channels of HPQ. What grand strategy could it hope to adopt to give the market leader a run for its money? The case also offers a classic case in point of the extent (or otherwise) that an MNC can leverage its position as a distributor of another firm's product line, (i.e., Lexmark's printers).